Bank credits to industry: squeeze amidst plenty

By Dr. A.S.Firoz

Scarcity of capital and the consequent high interest rates in the country are often blamed for the lack of competitiveness of the Indian industry. In fact, major industry associations perceive this factor as one that is largely responsible for the slow industrial progress in the country. There is a large element of truth in it. However, the factor cited is exaggerated and misplaced in perspective. There is a common tendency to compare interest rates here with those abroad.

One big mistake is not taking into consideration the differences in the inflation rates in the respective countries or regions - only the nominal rates of interest is taken into account. Although it is not contested that the inflation-adjusted effective rates of interest in India are still high in global comparison, these are on a decline over the years. And for known reasons, they cannot be brought down to global levels immediately. After all, interest rates are not subject to individual whims and fancies. They reflect the costs of capital and its scarcity. Interest rates are also risk determined. Rates will be higher when the risk perceived is more.

The same is true the other way round. In India, it has not been so much a problem of scarcity of capital for investment. Rather, it is the risk element that comes on the way between the banks and the industry. Banks have been flush with funds and are ready to support any viable project of a reliable entrepreneur.

Before coming to this point, let us have a look at the post reform scenario of funds flow from the banks to the industrial sector at a macro level. Interestingly, after the economic reforms were brought in, it is the industrial sector that stood to gain the most. Liberalisation of the capital market and a liberal investment policy made for large inflow of investment resources into this sector. The banks gave more money to industries than to any other sector in the economy. Excluding the credit flow from the all India financial institutions, the scheduled commercial banks (SCB) in India increased their lending to the industrial sector from about Rs. 79 thousand crore in 1992-93 to Rs. 188 thousand crores in 1998-99. With this the industry saw their share in the total lending of the SCBs rise from 48.6 per cent to 49.15 per cent.

In contrast, the same for agriculture has fallen from 13.58 per cent to 10.69 per cent. It dropped for trade as well - from 15.31 per cent to 13.67 per cent. This shows a relative shift in the loan disbursement pattern in favour of the industry. The numbers exclude the loans indirectly going into the industrial sector through financing companies. The industry also benefited indirectly in no small measure from the large increases in personal loans disbursed for buying consumer durables or for housing. The personal loans disbursed increased from Rs.13.5 thousand crore in 1992-93 to Rs. 39.6 thousand crore in 1998-99 - a 193 per cent increase.

The industries also benefited from sharp increases in the loans sanctioned to other service activities including transport operation. All these worked to sustain strong markets for industrial products. The private sector was to gain the most from it. Credit from the SCBs to the private sector increased from Rs. 50.2 thousand crore in 1992-93 to Rs. 141.4 thousand crore. Of the total credit, the share of the private companies' shot up from 38.55 per cent in 1992-93 to 48.1 per cent in 1998-99. The industrial sector, especially the private sub sector in it, gained the most with the rise of the disbursement of the all India financial institutions' credit (to the private and public sector together) from Rs.22.2 thousand crore in 1992-93 to Rs.67.1 thousand crore in 1999-00. The private industrial sector's growth should have been propelled and supported by the liberalised capital market. The opening up of the capital market was expected to help the private industries the most. In fact, this sector gained the most in the early period as mobilisation of funds from the primary market by the private sector registered an increase from Rs. 19.4 thousand crore in 1992-93 to Rs. 34.8 thousand crore in 1994-95.

However, a series of scams in the domestic capital market and investment failures made the private individual investors suspicious of the capital market. As a result, mobilisation dropped in the subsequent years to a low of Rs. 12.4 thousand crores in 1998-99. It has risen to about Rs. 22.4 thousand crore last year, fundamentally due to the IT industry's strength. It is the failure to tap funds from the primary capital market that left the private industries capital starved all the time.

The industry also gained the most from foreign direct investments. The same increased from $ 315 million in 1992-93 to $2140 million in 1999-00. The industry also benefited from the inflow of portfolio investments that kept the stock markets strong. However speculative these portfolio investments may be, the increase in the annual net inflow from $242 million to $3024 million during the same period did really help the Indian companies mobilise their resources as and when needed and make their stocks more attractive to the investors.

Although a good amount of money came in the form of GDR and ADR issues as well as through external commercial borrowings, the situation turned pathetic with the amounts dropping to abysmal levels in 1998-99.  The position improved a little last fiscal once again with the IT industries contributing in large measures in boosting up resource mobilisation from external sources.

As for the cost of finance, over the years, the interest rates have fallen substantially. The prime lending rates of the all India financial institutions dropped from 19 per cent in 1992-93 to about 12.5 per cent now. In 1992-93, a huge 26.09 per cent of the credit by the SCBs was accounted for by loans at interest rates above 20 per cent. The next lower band, 18-20 per cent, accounted for 15.74 per cent of all the loans disbursed. The corresponding figures in 1998-99 were 4.86 and 10.5 per cent respectively. Also, in 1998-99, 20.38 per cent of the loans were in the interest band of 12-14 per cent and 20.17 per cent in 16-17 per cent band. The difference between the maximum deposit and the minimum lending rates that stood at 8 per cent came down to 2 per cent in 1998-99.

Although this band is more or less the global standard, the same cannot be totally attributed to the increased efficiency of the Indian banking sector. In fact, banks and financial institutions worked to subsidise the industrial sector at the cost of its own potential gains or depriving depositors to the same extent by not providing a higher interest rate on their deposits. The main problem with the India's industries is not so much with scarcity or the cost of capital. It is the lack of good investment projects. With increased globalisation, the Indian industries have come to face stiff global competition on the home turf. Although enormous opportunities are emerging on the export front, the country's entrepreneurs are yet to exploit these fully.

With failures in a number of big investment projects, banks are also circumspect of funding large projects. Commercial banks and financial institutions are already worried over the huge non-performing assets they have accumulated in the last few years. Any further increase in it will adversely affect their balance sheets for sure. In this, banks - most of which are accountable to the government, not only have the problem of facing government scrutiny, their image in the public as publicly held companies will also take a beating if their profits drop to uncomfortable levels.

In this scenario, the industry cannot really expect more from the banks. But if caution and calculations exceed necessary limits, the genuine investor also gets hit. It is the small and medium enterprises that will have to face the brunt of the credit squeeze. Let trust prevail in business, but let it work both ways.